Steven Gitlin - Vice President of Marketing Strategy and Communications Timothy E. Conver - Chairman, Chief Executive Officer, President and Member of Executive Committee Jikun Kim - Chief Financial Officer, Principal Accounting Officer and Senior Vice President Tom Herring - Chief Operating Officer and Senior Vice President

Andrea James - Dougherty & Company LLC, Research Division Greg Konrad - Jefferies & Company, Inc., Research Division Jeremy W. Devaney - BB&T Capital Markets, Research Division Michael F. Ciarmoli - KeyBanc Capital Markets Inc., Research Division Josephine Lin Millward - The Benchmark Company, LLC, Research Division Brian W. Ruttenbur - CRT Capital Group LLC, Research Division Peter J. Arment - Sterne Agee & Leach Inc., Research Division Tyler Hojo - Sidoti & Company, LLC Joseph W. DeNardi - Stifel, Nicolaus & Co., Inc., Research Division Nicholas Sammut - Goldman Sachs Group Inc., Research Division Douglas A. Christopher - Crowell, Weedon & Co., Research Division

Good day, ladies and gentlemen, and thank you for standing by, and welcome to AeroVironment Second Quarter Fiscal 2013 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded for replay purposes. With us today from the company is the Chairman and Chief Executive Officer, Mr. Tim Conver; Chief Financial Officer, Mr. Jikun Kim; and Chief Operating Officer, Mr. Tom Herring; and Vice President of Investor Relations, Mr. Steven Gitlin. And now at this time, I would like to the conference over to Mr. Gitlin. Please go ahead, sir.

Thank you, Hewey. Welcome to our second quarter fiscal year 2013 earnings call. Please note that on this call, certain information presented contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are based on current expectations, forecasts and assumptions that involve risks and uncertainties, including but not limited to: economic, competitive, governmental and technological factors outside of our control that may cause our business strategy or actual results to differ materially from the forward-looking statements. For a list and description of such risks and uncertainties, see the reports we filed with the Securities and Exchange Commission. Investors are cautioned not to place undue reliance on any forward-looking statements, which speak only as of the date on which they are made. We do not intend and undertake no obligation to update any forward-looking statements, whether as a result of new information, future events or otherwise. The content of this conference call contains time-sensitive information that is accurate only as of today, December 4, 2012. The company undertakes no obligation to make any revision to the statements contained in our remarks or to update them to reflect the events or circumstances occurring after this conference call. We will now begin with remarks from Tim Conver. Tim?

Thank you, Steve. On today's call, I'll review our solid second quarter performance, business highlights and growth plans. Jikun will review our financial results and then, I'll discuss our view for the balance of the year. I'll begin our discussion of quarter 2 by emphasizing 3 main points: first, our quarterly performance was strong. EPS increased by 30% year-over-year. Profitability improved in both business segments and revenue matched last year's second quarter at $80 million. Second, contracts we originally planned for the first half of our fiscal year are now expected to be received in the second half. These expected contracting actions are proceeding, and revenue plan for Q4 has been increased. Third, we made significant progress during the quarter in positioning our business for sustained growth, both within and beyond our historic base. Important product upgrades moved through initial production, and we completed important development milestones and large new opportunities for Switchblade, mission services and Tier II vertical takeoff and landing. Now let's discuss Q2 performance. Effective team execution produced higher revenue in the quarter than we initially forecasted. Strong PosiCharge revenue helped our EES segment to again improve year-over-year sales. In the UAS segment, a majority, but not all, of the potential Q2 international small UAS deliveries were completed. Gross margin improved in both segments, the result of favorable product mix and cost controls that were implemented during the quarter. We can assess fiscal '13 revenue visibility by summing a few components we discussed last quarter. We closed the first half with revenue of $139 million and funded backlog for fiscal '13 of $87 million. To that, we added Q3 bookings to-date of $13 million, the remaining $30 million of the Army government fiscal '12 contract in process and an assumption of flat year-over-year EES revenue, which yields…

Thank you, Tim, and good afternoon, everyone. AeroVironment FY '13 Q2 results are as follows. Revenue for the second quarter was $80.3 million, relatively unchanged from Q2 last year of $80.4 million. Looking at revenue by segment, UAS revenue was $65.4 million, a decrease of 2% over the prior year. The decrease in UAS revenue was largely due to lower service revenues of $11.1 million, driven by fewer DDL retrofits of our Raven B systems. This decrease was offset by higher customer-funded R&D work of $7.7 million, largely due to the Switchblade program; and higher product deliveries of $1.9 million driven by our Raven and Wasp system deliveries. EES revenue was $14.8 million, an increase of 10% from Q2 last year, primarily due to higher product deliveries of our industrial electric vehicle charging systems, offset by fewer electric vehicle test systems deliveries. Turning to gross margin. Gross margin in the second quarter was $35.6 million, up 16% from the second quarter last year. Gross margin as a percent of revenue was 44% versus 38% in the second quarter last year. By segment, UAS gross margin was $30.2 million, up 11% from the second quarter last year, primarily due to a favorable sales mix of products and contracts, as well as higher overall product revenues. Also contributing to the higher gross margin was lower overall manufacturing and engineering overhead support cost. As a percent of revenue, UAS gross margin was 46% compared to 41% in the second quarter last year. EES gross margin was $5.5 million, up 61% from the second quarter last year, primarily due to an increase in the sales mix of higher margin products and lower overall manufacturing and engineering overhead support cost. As a percent of revenue, EES gross margin was 37% versus 25% in the second…

Thank you, Jikun. I spoke earlier of contract delays, pushing more of our fiscal '13 revenue into Q4. Importantly, none of the significant new government orders built into our fiscal '13 plan have been lost. And with the exception of a couple of international small UAS orders that slipped further out, we expect to receive all of them in the second half. We currently expect to be under contract early enough in the second half to support Q3 revenue of about $85 million to $95 million, and a much larger Q4. We have a history of executing on heavy deliveries and cyclically high fourth quarters. This history makes us confident in our ability to perform, assuming the order timing we expect. With our current order flow visibility, we restate our fiscal '13 revenue guidance of $348 million to $370 million with fully-diluted earnings per share of $1.41 to $1.51. Beyond fiscal '13, we plan to maintain our market leadership and current small UAS and EES businesses, driving revenue from product support services and system upgrades. We also plan to establish early leadership in emerging markets that are all large. We have technology leadership and strong working relationships with early adopters in each area. We have the capital structure and agility to execute strategic investments when necessary, to support adoption and capture market share. We're well positioned for market leadership as customers adopt in numerous new markets, most of which represent billion-dollar opportunities. As usual, the timing and the rate of adoption are uncertain, but we're confident that we will secure significant long-term compounded growth from mission services, domestic UAS, Tier II vertical takeoff and landing, Switchblade and Global Observer. Thank you for your time today. Now Jikun, Tom and I will take your questions.

[Operator Instructions] Our first question comes from the line of Andrea James with Dougherty & Company. Andrea James - Dougherty & Company LLC, Research Division: The CybAero partnership, and forgive me for not getting this, was the catalyst to the partnership the State Department RFP? And then I guess, the second part to that would be -- I'd love if you could elaborate with any other information you've got about that State Department RFP.

Andrea, well, it is clear from the State Department RFP that both small UAS and Tier II VTOL are required to meet their need. It's also clear that there are other current customers of ours that have needs for vertical takeoff and landing capability in the Tier II space. We've been looking at the opportunities to move from Tier I to Tier II for some time, and we've gone through an exhaustive evaluation of alternatives. And we do believe, as I mentioned in the call, that the entire space, for us, offers an increased market opportunity north of $1 billion. So it's clearly something that has been important to us for some time. The decision to make our initial move into this space with the CybAero partnership was a result of that exhaustive review. We're convinced that this is the optimal solution that will combine the very significant pioneering platform that they've developed with a number of the controls and insights that we have, both from our existing UAS solutions and from our insight into our U.S. customer needs. So I don't know if that answered your question, but there's a first cut at it. Andrea James - Dougherty & Company LLC, Research Division: No, I appreciate it. That's great. And then, I know that sort of what Congress is going to do, and anything with sequestration as anybody's guess. But I was wondering, sort of, the feedback that you've gotten from your customers so far about that whole thing and any impact that it would have on your deliveries? And then, also, if that would upset some of the international sales that you guys do that may run through some U.S. contracts, even though the shipments are international.

Well, I can confirm to you that I do not know what's going to happen with sequestration. I do know that the uncertainty adds friction in the system, and in particular, in the contracting process. I think we have, obviously -- well, I know we've obviously talked closely with our customers regarding potential effects on their intent with needs that they have for our solutions. We believe that it will not affect our current outlook for fiscal '12 as best as we can determine it at this point. Certainly, any resolution will help to alleviate the uncertainty. And I think, on a broader basis, even though it's 9.5% potential -- potential effect is a big number, we still are budget dust in the greater scheme of defense acquisition, and we believe our solutions are -- continue to be a high priority for small teams in harm's way. So we're proceeding with that expectation. You also mentioned a question about international effects. I have not been able to discern an effect that sequestration would have on international demand. The overall global economy and defense budgets in various countries has had some effect, I think, in delaying some of the contracts potentially, particularly the couple that I mentioned in the prior comments that we have seen slide out beyond this year. Nevertheless, they're still in the plans for acquisition by those countries, and we expect them in the future.

Our next question comes from Greg Konrad with Jefferies. Greg Konrad - Jefferies & Company, Inc., Research Division: I was just wondering, I mean, it seems like with the cash on the balance sheet sufficient to meet capital requirements for new products, and given the likelihood of change in taxes, has there been any discussions of possibly returning cash to shareholders?

Well, capital acquisition has been a significant focus for me, for Jikun and for the board for some time. As we continuously review that situation, one of the foundational questions is, "Do we have excess cash?" And we look at that in the context of our regular reviews of what our needs are going to be to execute our growth strategy. As you know, that's an organic growth strategy. It's based on innovation, it's targeted on large markets. It requires us and our customers to make major changes in the course of adoption of these solutions, and it carries with it a significant uncertainty of timing. At the same time, the larger the markets we're targeting, the larger the potential moves we would need to make would be to secure the adoption and to secure our long-term position for those markets as they grow. And the potential moves can grow exponentially as we approach an inflection point of adoption in any given market. So that's part of what we review on a regular basis. To date, we have not concluded that we do have excess cash in that context. As we continue to review that issue and do make that conclusion, then of course, we will revisit our capital allocation. Greg Konrad - Jefferies & Company, Inc., Research Division: And then, just margins for the quarter were very impressive, and for both segments, you talked about taking out overhead. Can you dig into that a little bit deeper? And then, also, if there's more overhead that can be taken out of the businesses over the next couple of quarters?

Yes, in general, the 2 segments saw gross margin increases. I think at the UAS segment, most of the contribution to the expansion of gross margins are primarily due to higher product mix and a better contract mix. And then the minority would be related to the overhead cost reduction. And likewise, the EES. Historically, if you go back to EES's gross margins prior to FY '12, you would see that they have been hovering in the low-40%. So this is our way of getting back to our historical norms; albeit, we do have a slightly different product mix now with EV Solutions, as well as very strong contribution on the cost-cutting measures. Now we continue to review our cost and our cost structure, and we continue to make improvements as necessary, given the environment that we're in.

Our next question comes from Jeremy Devaney with BB&T Capital Markets. Jeremy W. Devaney - BB&T Capital Markets, Research Division: I was wondering if you could talk a little bit about customer behavior in the quarter. Backlog came down slightly and we heard earlier in the quarter that there's still some customer behavior with these little contracts, and you seem to be reiterating that here. What kind of customer actions have you seen that have been more proactive that gives you confidence that the delays won't actually lead to -- or getting pushed out from the fiscal year?

Well, Jeremy, one example could be the high profile Army Raven contract for the government fiscal year '12 requirement. That's -- obviously, we're well into that year, if not beyond. And it's a funded requirement that we and our customer fully expect to be fully executed. Nevertheless, that process has been going on for many months. I suspect that while they have probably plenty of reasons but nevertheless, we have an ongoing engagement with the customer in that contract, and incremental funding has continued to flow. So we -- I think we have a good handle on their intent, and if not, the final execution schedule that they're able to fit into their other priorities. Other customers with other requirements, to the extent that it is appropriate for us to have an ongoing dialogue, we do that. And in all of those cases, our feedback from the customer has been a reassurance of their intent. And there are various reasons for the slow schedules in those areas where schedules have slowed. And they seem to vary. So I've categorized it as just more friction in the system, which I'm sure is contributed to by an uncertainty at the various service levels about what future budgets will be. But that doesn't seem to have translated into a question of whether they intend to proceed or not.

This is Tom. From my perspective, Jeremy, the end-users' need for these equipment ultimately will drive the behavior of the contracting organization, and the users continue to have a greater and greater demand for these capabilities. So I have yet to see the contracting organization failed to meet the needs of our end users. Jeremy W. Devaney - BB&T Capital Markets, Research Division: All right. And Tom, that actually brings me to my second question. I want to get more granular on the Army customers. There's a couple of events that has happened recently that I was wondering if you could give any indication of whether or not you're seeing any increase in traction or any communication from customers that demand might be ramping. One is, brigade combat team restructuring has been completed. They haven't officially announced anything to the public yet. They have a trade occ recently revised the doctrine for the training on your systems where they're going to the master trainer's system. And then, all that at the same time, you introduced Vampire. And then, lastly, we're still waiting on the ramp-up on the total Army acquisition objective. I've heard that's sitting on a 3-star desk right now, but I mean, any indication on any of those points that you're hearing from your customer that might further increase the demand in the funding?

Well, the issue of the CPD and the basis of issue discussions, I guess, all have been ongoing for some time. I won't refute or confirm what you just said about where the CPD stands at the moment. I do know it's drawn a tremendous amount of attention, and we do expect it to be resolved shortly. But that's all I can really say about that particular subject. On the issue of training, I think Tim mentioned earlier in the discussion that there will be an IDIQ generated. We expect an IDIQ proposal to be generated, which will provide for multiple years of services, which will include both training and repair capability. And that will be put out on the Street as a small business set-aside and we'll be working with potential partners in that to make sure that we participate and assure that what the customer gets meets their needs.

Our next question comes from the line of Michael Ciarmoli with KeyBanc Capital Markets.

Tim, if I could maybe just step back and think about achieving this fiscal '13 outlook, am I to understand that the $87 million that you've -- or $90 million backlog, you'll execute on most of that? You've got $13 million booked already this quarter, which you'll execute on; $30 million of Raven funding, which you'll execute on; and then, you'll keep EES roughly flat. That helps us abridge some of the way there or that 79% visibility to this year. If I'm thinking about that correctly, and there's some contracting paralysis, how do you think about entering 2014 with any comfortable visibility?

We -- I guess, 2 parts of the answer, Mike. In the first place, we're pursuing a number of identified opportunities that we expect to close on in the second half. The revenue associated with those opportunities is considerably more than what we need to meet our outlook expectations. Now that's a good thing because we have a first half history of delayed contracts, so we need some flexibility there in the event that the world doesn't suddenly change overnight. And as we look beyond this year, going forward, we're in the process of beginning our long-term planning process, which will involve, ultimately, FY -- our fiscal year '14 will be the first year of that multi-year plan. And the areas that I discussed in the earlier parts of my comments point to the large areas of ongoing growth that we think will show up in that period, and we think we'll have significant early revenues in the first couple of years of that planning process coming from most of those areas. So -- and you'll notice that a lot of those are adjacent markets, a lot of those are outside of DoD. And those that are inside the DoD are for new requirements that appear to have a very high priority for adoption with multiple customers. So I think it's a little different picture than if we were just looking at our existing business base alone and projecting that into the next year.

Okay. And then, so -- I mean, so is it fair to say, then, that you guys think you can have a book-to-bill greater than 1, I mean, for the back half of this year, with all those opportunities?

Well, certainly, we can have. I'm not -- it's not a metric that we predicted in the past, and I don't think we'll move to that now. My point was not to say that we expected a huge overbooking in the second half, but to say we're pursuing a number of opportunities that give us more flexibility if we continue to see some friction in the contracting process.

Our next question comes from the line of Josephine Millward with The Benchmark Company.

You mentioned that you're expecting a $248 million IDIQ from the Army for a family of small UAS in the near term. Now just to clarify, does this mean the Army has [indiscernible] structure? And...

Could you repeat that, Josephine? We -- you broke up during the question.

Sure. You're expecting a large IDIQ from the Army so -- for a family of small UAS. Does it mean that the Army has decided to expand from the Raven into the Puma and the Wasp within the 4-system [ph] structure? Have they made those commitments? And does it mean it's not going to be completed [ph]?

I think it's -- what it means is the Army is moving to put a new contracting mechanism in place that will provide a multi-year IDIQ ability to execute on their needs for multiple years. We see this as a good thing. We think it'll be very helpful in the contracting process going forward. We expect the Army to place -- to make multiple awards under that contract. We think that it will be the vehicle that they use to continue to acquire Ravens and Pumas and payloads and multiple other services. It has the potential, the way we read the description, to incorporate a broader definition of a Family of Systems as the Army decides on that through things like deciding on the CPD that Tom was discussing earlier. So we think it's -- it sets up a structure for them to execute their short-term and long-term intent. And we think the fact that it will provide multiple awards, it makes that -- we understand that that's the tenor and the tendency in government contracting going forward, and we have a strong history of competitive success here. And again, we think this is a good thing for us and for our customer.

It sounds like you're stepping in the right direction, Tim. Now I believe the FAA was supposed to issue the rules of operations for small UAS early this year. Why has it been delayed? And do you expect to start selling to the civil market sometime next year?

Well, it does appear to have been delayed. Our current expectation is the first part of next year. But then, we probably said the same thing 1 year ago...

Well, actually that was what the FAA said. So it's not really your fault, but...

We are engaged with the multiple lead adopters -- customers that we believe are lead adopters in this area. And the FAA has made the process for those customers to get a certificate of authorization to use small UAS. They've made that process less cumbersome, and multiple customers are engaged in trying to take advantage of that. So we're working with them. We will see, I think, early adoption before the full market is opened up through promulgated rules from the FAA, and guess -- your guess and my guess are probably both guesses as to when that will happen, but I would reinforce our belief that customers in this market are anxious. They see a very significant advantage to execute their public safety mission, and we think it's likely to be a very large opportunity as it matures.

Our next question comes from Brian Ruttenbur with CRT Capital.

First of all, on gross margins in the third quarter, you had very strong gross margins in the UAS division this quarter, and I just wanted to talk about where you see margins going in the third quarter on -- it sounds like relatively similar revenues.

Yes. We don't make a practice of guiding gross margin. But if you look at the EPS that has to be reached to be able to hit the midpoint of our guidance on the EPS side, you'll see that the gross margin does come down a bit from the second quarter.

Okay. Is there a reason for that?

Well, in the second quarter, we did have a very favorable product and contract mix at UAS.

You might recall that, historically, our fixed-price business tends to produce better margins than our cost-plus business and, similarly, our product business versus our service business. So as Jikun said, historically, we've been sensitive to the product mix and the contract mix at the gross margin level.

Our next question comes from Peter Arment with Sterne Agee. Peter J. Arment - Sterne Agee & Leach Inc., Research Division: Tim, can I just get a clarification on the -- back to the question I think Josephine was mentioning on the $248 million multiyear regarding the Family of Systems. Does that end up resetting the kind of the requirement that the Army had wanted to originally procure? Or will they finish the kind of stated requirement they had out there for Ravens and some of the other systems, and then this would just be a new set that they'd be moving forward?

Yes. Thanks, Peter. The -- I don't see a direct link. I think this is a new contracting mechanism. The original IDIQ expired previously, and we've been going on other contracting mechanisms in -- since then. So I think this is a new long-term contracting mechanism that encompasses all of the Army's current and anticipated needs within a Family of Systems for small UAS. Now independently, the Army is pursuing a decision process around what that Family of Systems should include and how many and what the increases in the -- in a basis of issue might be, and I believe they've anticipated a range of outcomes in that pursuit to be covered by the -- this new IDIQ that they're now putting in place. Peter J. Arment - Sterne Agee & Leach Inc., Research Division: Okay. No, that's very helpful. And then, just a clarification on the tax rate. Is -- should we expect a similar rate going forward? So I think 34%. Is that the correct number?

From a guidance standpoint, we're going with 30% for the full year. That assumes the federal R&D tax credit does gets reinstated and retroactively put in place by our -- by the end of our fiscal year. If it does that, then you're correct, it will be closer to 34%.

Next questioner in queue comes from Tyler Hojo with Sidoti & Company. Tyler Hojo - Sidoti & Company, LLC: I just wanted to follow up with Mike's question. I'm just curious, when we look at the guidance, I know you called out some orders that need to hit in the back half of the year. But I was wondering if you could maybe attempt to, kind of, call out maybe the magnitude or the timing of maybe particular orders that could have a material swing factor one way or the other?

Tyler, I think we're going to avoid get -- predicting specific orders and specific product revenues for the same -- for the reason we always have. So we think we'll just leave it where we've got it at this point.

Yes. Tyler, just to bring you back to the 3 growth drivers that we identified in our previous calls. Basically, we do expect our international SUAS to contribute to the growth of the company, as well as Switchblade and EES. Tyler Hojo - Sidoti & Company, LLC: Right. But I mean, going into this quarter, you guys called out that you -- there was a possibility that a $15 million international order would hit, and it obviously did, which drove the strong quarter. I mean, there's nothing like that that you can perhaps point to one way or the other in the back half. Is that correct?

Yes. I think the reason we pointed that out last quarter was it was -- because it would have the potential to have a significant swing, and we could reasonably anticipate that the bureaucratic requirements of completing export transactions could get in the way of that operation in the -- which was planned for the third week of the quarter. We mentioned $15 million. It was not a $15 million requirement. There were actually 5 or 6 different contracts with different countries, and we did manage to successfully complete a majority of those, but some did run into those hangups and they'll be completed presumably this quarter.

And, Tyler, just to -- I believe all of those contracts that Tim was referring to were actually in backlog at the time of the call. These weren't contracts that we were projecting to receive, but contracts that we -- we were trying to take actions to ensure that we would get through all the export requirements and really nailing down the customer needs to ensure that we could deliver them in the third month of the quarter. But it was a big deal that was towards the end of the quarter. I think that's the reason we spoke of it.

Next question comes from Joe DeNardi with Stifel, Nicolaus. Joseph W. DeNardi - Stifel, Nicolaus & Co., Inc., Research Division: I'm going to try and ask the guidance question, well, a different way. I mean, you guys talked about how sales were a little stronger than expected in the quarter, and you sound pretty confident about the timing of orders for the rest of the year. Can you just talk about, kind of, what the factors are that get you to each side of your sales and earnings guidance ranges and kind of whether your bias is now towards the high end, given the strong quarter?

Well, I think the -- in general, it's -- the variance will be the timing of order receipt. And I think I wouldn't want to buy us our expectations within our guidance range any more than just reiterating the original range. I think when we set that, we did so, acknowledging that there was a higher level of uncertainty in our minds this year because of the uncertainty in the government budget that was flowing down and an expectation that regardless of the outcome of those ultimate budgets, that the uncertainty itself was likely to put friction into the contracting system, and I think we've seen that. So the uncertainty going forward is really the same that we saw in the first part of the year. And I don't think we have an ability to help refine that any more at this point. Joseph W. DeNardi - Stifel, Nicolaus & Co., Inc., Research Division: Okay. And then, Jikun, if you could just give us where you guys are against the Army acquisition objective for Raven?

Sure. The objective -- Army acquisition objective is 2,358 systems. We are 81% into that, or 1,907 systems.

Our next question comes from Noah Poponak with Goldman Sachs.

This is Nick in for Noah today. So I have a question on EES margin. Tim, you mentioned that there's a systems upgrade that came through. I was wondering if you can just speak around the impact that had on margin? And then if you could just look back to the first quarter of last year, we've seen some pretty sequential growth. I was wondering how much further that's going to go until we hit that mean reversion you were speaking to earlier?

Excuse me, Nick, at the last part of your question, how much further that will go on until when?

Yes. Jikun, I was just speaking to the mean reversion to the historical norm in the low 40s, even with the new mix, just looking at timing in terms of how far you're going to get out until you hit that mean reversion.

I -- Jikun and I probably have 2 different instruments playing this song. So I agree with everything he said. I think, in general, we -- as Jikun pointed out, we've got the impact of our entry into the on-road electric vehicle infrastructure market. We all know that depressed the gross margin and the overall profitability of that segment 1 year ago, and we've been improving gross margin ever since. So I think that's the reversion to the mean that he was referring to. I think, in that segment of the business, we'll probably see, longer term, both margin growth as a function of scaling the business. So that gets back to significant revenue growth in that piece of the EES business, and that gets back to electric vehicle adoption. But in general, we're -- I think we are where we are, and I don't see any major near-term changes to the way we're executing that business right now.

Okay, great. And then, just...

There was a second part of your question that now I've managed to...

Yes, it was just -- you mentioned earlier a systems upgrade. And now...

The effect of the -- of that product improvement on the battery management system that was moved into production this year. I think, as usual, in its first transition to production, a major product improvement probably negatively impacted margins. And as we transition to full production rates and shake out the bugs, we should see some improvement from that particular component.

Our next question comes from Doug Christopher with Crowell, Weedon. Douglas A. Christopher - Crowell, Weedon & Co., Research Division: Just looking at the last sentence of the first paragraph. You mentioned Switchblade mission services and then the unmanned helicopters. Can you say, looking beyond this fiscal year, how would -- how might you expect those 3 items -- or, in your sense, to begin contributing to revenues? Does mission services depend on the non-military side kicking in? Switchblade and the unmanned helicopters there already exist. What's kind of behind their roll-out into your revenue system?

Well, I guess, first, I would say that we -- as I discussed earlier, we think each one of those represents very large long-term market potential for us. And our assessment of the size of those markets, in most all cases, starts with a B for billion. Mission services, it represents a process whereby rather than selling airplane systems to a customer and then selling support services for that, we contract to provide -- to use those, to own and operate those systems ourselves to our customers benefit and deliver the situational awareness information to them when and where they need it. Those customers tend to be government customers within and without the Department of Defense. We talked about 1 customer outside of the Department of Defense earlier today. The -- in the case of that customer, there's probably a significant element of their adoption and growth would be that particular request for proposal that is on the street and their contracting process associated with that. We believe others exist, and we'll talk about those as they enter into contracts. Another part of the market was the domestic unmanned airplane systems applications, probably largely tied to the rule-making process of the FAA that now looks like it will get seriously started next year rather than this year. Tier II VTOL addresses both mission services to the extent that customers require both, but it's also a completely independent new solution to -- that can be delivered to other customers. Those customers, presumably, would be both within and without the United States and both defense and non-defense government customers. We know of existing customers that have that requirement, and we believe that within, the foreseeable future, they'll be making procurement decisions. By foreseeable future, that probably means next year. Switchblade is growing now. The -- there are significant requirements and -- from a number of customers that we believe are likely to execute over the next 12 and 24 months. That request for information that I mentioned in my earlier comments was apparently a preliminary request associated with a potential program of record that probably would be timed around 2015 government fiscal year maybe. So does that help you put some time frames around those sizable opportunities? Douglas A. Christopher - Crowell, Weedon & Co., Research Division: Yes, that's very helpful.

Our next question comes from Jeremy Devaney with BB&T Capital Markets. Jeremy W. Devaney - BB&T Capital Markets, Research Division: I just wanted to go back to the cost structure for a minute. I'm just very surprised by the gross margin this quarter, and -- how much of what was taken out of the cost structure was fixed versus variable? And I know you also indicated that some of the gross margin benefit in the quarter was really the result of products -- product mix. What was the most surprising part of the product mix? I know you don't like to drill down into specific platforms, but are we looking at international or just specific UAS platforms? EES is particularly strong as well with a strong PosiCharge quarter. Just some more granularity there so we can figure out if this is something that we can expect to reoccur, how to think about this going forward.

Well, you'll probably get an answer from both Jikun and I here. I think on the part -- you've got the mix right on EES. There was, as we mentioned, strong revenues from PosiCharge that quarter, and that made a major difference there. We also made quite a bit of a focus on cost containment at EES, again, as Jikun talked about earlier. The -- it's -- in UAS, I think, the mix issue is largely associated with fixed-price products being a much higher percentage of the mix than cost-plus services. And again, we're focusing on controlling costs, both at the overhead level and at discretionary expenses.

Yes, I would concur with everything Tim just said. I think the question you asked about cost structure, the variables versus the fixed, I would say most were fixed-related and some portion of it was variable. Jeremy W. Devaney - BB&T Capital Markets, Research Division: All right. Great. And then, if we could just talk about Switchblade again for a second. I know you just broke up a timeframe for us on what you're thinking on that RFP. 1,250 systems is -- that's quite a magnitude of difference from where we are today with 75 systems. I mean, that 75 systems, call it mid-teens millions in revenue. You're talking about $200,000 a system maybe. Rough order of magnitude, $250 million opportunity out in '15, are we in a ballpark?

Well, I wouldn't get to the conclusion you got to on unit prices, and that's, I think, because our Switchblade revenues currently are derived from a mix of development funding as well as small volume, low initial rate production hardware -- yes. And there are services, in addition to that that add to the total work we're doing for our customers and as a result of revenue we're receiving for that. So the quantity change is significant, but I don't think you can divide revenue by 75 to get that number. In general, a switch -- even though that the Switchblade is a munition and is classified as a munition, it's a loitering munition. And in order to get that loitering capability, it has many if not most of the same subsystems that our small UAS have, and it also has a composite airframe. In addition to all of those similar subsystems, of course, it has ammunition. On the other hand, because it's a onetime-use vehicle, we think the potential for volume is much higher and therefore, the potential for the volume-related cost savings over time, as volume grows, is higher. But that -- I don't know if that goes a long ways to helping you get a sense of the revenue potential. But it's, again, very significant.

Our next question comes from Michael Ciarmoli with KeyBanc Capital Markets.

Could -- Tim, could you just maybe elaborate -- you mentioned some of the growth drivers, international and Switchblade. Can you give us the year-to-date, year-over-year growth numbers, just so we have some context in terms -- and maybe, specifically on the international, what percentage of the business is coming from international and where those revenues have come from on a year-over-year basis?

Well, I want to avoid getting into specific products or market breakdown, Mike. But year-to-date, every 1 of those 3 elements has grown, and they've grown -- the Switchblade and international work have grown significantly, and we expect all 3 to grow year-over-year by the time we're done with 2 more quarters and -- but I don't think I can really get into a finer grain breakdown of that without starting a habit that I probably will have regretted if I did.

Next question comes from Brian Ruttenbur with CRT Capital.

As a follow-up, just real quick -- a couple of quick ones. What is your percentage of your revenue from supplemental and then also percentage of your revenue from line items from the quarter?

Historically, the identified budget line items generates about a 33% of UAS revenues. This has gone back many years. You mean OCO funding?

That's correct.

Yes, I don't think we -- again, we make a practice of breaking that out separately.

Okay. Then how much percentage, if you're saying 1/3 is an actual line item, can you talk about how much is from the core?

I guess I'm not understanding what you mean by...

Your core defense budget, what percentage of your revenue comes from the core, or you don't break that out? The core defense budget versus the OCO?

No, we haven't -- we don't break that out, Brian. And usually, that's -- to the degree it's in the budget but not identified, it's buried in -- at some micro level within a program.

Okay. So that 33% is line item from the core? Is that correct? Or is that just line item from OCO and core?

From -- it's a -- let's be careful. It's a cumulative number over many years, and this is what the average IDUAS [ph] has been for quite a few years. Procurement...

Okay. Is it from the core and supplemental or -- as OCO, or is it just from the core?

It's based on the budgetary documents, and I believe some of the OCO funding is in the budgetary documents.

And that is all the time we have for questions. So we'd like to turn the time back over to Mr. Gitlin for any additional or closing comments.

Thank you all for your attention and your interest in AeroVironment. An archived version of this call, all SEC filings and relevant company and industry news can be found on our website, www.avinc.com. We look forward to speaking with you again following next quarter's results.

Thank you, presenters. That concludes today's conference call. Thank you for your participation. Attendees, you may disconnect at this time.